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Sector-by-sector insights for small caps following reporting season

By Matt Griffin
Co-portfolio Manager, Small Caps Sydney, Australia

The most striking thought provoked by February’s reporting season is that it has been a truly remarkable year.

Given the turmoil that has unfolded over the past 12 months, who could have envisioned that markets would be near record levels, with companies flush with cash, ready to pay dividends and pursue mergers and acquisitions?

Australian small-cap stocks are for the most part highly leveraged to the markets, and have responded to those peaks and troughs with rapid sell-offs as of last March and April through to the subsequent rebound. Today, they face some of the strongest conditions for earnings in many years, and the recent reporting season delivered even against high expectations. A lot of risk remains, but there is a clear path to reopening, and we expect these strong earning conditions to persist for at least the next six months.

Sector by sector, here are our views on where opportunities lie:

Mining services

On the back of soaring commodities markets, mining services were a key pick leading into reporting season. They generally delivered on expectations, but there were some areas of disappointment, in many cases stemming from those who prematurely anticipated the complete arrival of the next mining boom. While the first wave of commodity investment has arrived – in areas such as exploration, engineering, earthworks and new projects, we aren’t seeing the flow-on to big construction and mining jobs just yet.

However, we believe investors in mining services need to be attuned to movements in the underlying commodity market, and the best performers in recent reporting were the stocks most leveraged to the exploration spend. Junior mining companies in particular are raising money and drilling holes, and the companies hiring out the tools and technology to meet this demand are thriving, while others on the construction end are still waiting for the big projects to come through.

Throughout this progression an important theme will be the rising importance of projects and services exposed to the long-term decarbonisation trend, extracting commodities such as lithium, nickel, copper and graphite for electronic vehicles and other battery uses.


Food price inflation is in full swing and the trend to eating at home has proved a boon for grocers and fresh food producers, with some categories also expecting further growth of the back of restaurant re-openings. The small cap agriculture space is highly volatile, and investors need to be cautious with exposures given risks such as weather and customer concentration.

Structural growth

Core success for any effective small cap strategy lies in identifying those businesses which might not necessarily look cheap, but which have access to huge global runways to growth and are likely to be able to capitalise on the opportunity for some time to come. Now that we can look through short-term COVID impacts more clearly, a lot of these stories are coming back to the fore. We look for competitive advantage, a large addressable market and high return on equity measures to pick the future winners in this space.

Property and building materials

House prices are forecast to increase strongly through 2021, and there has been a large increase in detached housing approvals in recent months.1 This is positive news for companies connected with development and construction, but in a similar vein to recent demand for stocks in mining services, a lot of investors seem to have jumped the gun and prices probably ran up a little too much coming into the reporting season.

Many of these projects take many months or years to complete and, for many products and services such as drywall and bathroom fittings, revenues only really start to flow late in the cycle.

This looks to be an exceptionally strong sector in approximately 12-18 months’ time, as the full effect of today’s strong building approval numbers works its way through the system. The market has rationalised in recent years and with the mix shifting more towards houses than apartments, we could see very strong margins for investors in the building space.


Diverted and delayed demand has been a powerful influence in our economy over the past year. There appears to be a YOLO effect (You Only Live Once) at play, where those who’ve come through a troubling year with unanticipated savings as a result of limited spending opportunities are happy to open their wallets as the crisis subsides. The rise in savings and increasing discretionary spending has benefited retail enormously, with the strongest effects falling to online, and those shopping centres which are supporting families who move out of the cities and into the suburbs and further afield. While there is concern around how long the trend in surging retail sales can last, we believe it can go on longer than the market thinks but are cautious on retail stocks without internal growth drivers such as a store rollout plans or an online penetration story.


The other side of the retail trade is travel – heavily COVID affected but with a very strong outlook now that the vaccine rollout is in full swing. For 2021 we are in a rather unique situation whereby domestic travel will likely open up relatively soon, but international travel is unlikely to be meaningful while Australia lags the rest of the world in vaccinations. Travel companies with a domestic holiday focus or involved in international travel outside of Australia should benefit. We will likely see a surge in leisure travel as pent up demand is released, while corporate travel may take some time to get back to pre-COVID levels. Finally, there may be an accelerated structural shift to online travel agents as the world opens up given the closure of many bricks & mortar travel stores is likely to be permanent.

1Source: https://www.abs.gov.au/statistics/industry/building-and-construction/building-approvals-australia/latest-release

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.


This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.

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